A Blessing in Disguise for Allied Irish Bank?

Allied Irish Bank is instrumental in the recovery of the Irish economy.

A major development recently took place in Ireland when the country's High Court ordered the transfer of assets of two of the most troubled financial institutions -- Anglo Irish Bank and Irish Nationwide Building Society to Allied Irish Bank(NYSE: AIB) and Permanent TSB, respectively.

Essentially what we're seeing here is the final consolidation of the Irish financial system. Assets are being shifted from one government entity to the other, much like assets were rearranged during the American banking crisis. More significant is the fact that during these government restructurings, the government is effectively picking its winners for the long term -- like the U.S. government picked its winners in Wells Fargo(NYSE: WFC), Citibank(NYSE: C), Bank of America(NYSE: BAC), and JPMorgan(NYSE: JPM) in the dark days of the crisis.

What?The Irish court order is the result of a condition in which Ireland needs to comply with under its loan deal with the International Monetary Fund and European Union. This is a significant step toward Ireland's attempt to recover from its financial crisis and to bring back investors' confidence in the country's banking system. The order came on a day when the Irish were voting at the general elections.

What does all this mean?The transfer of assets to AIB includes $9.9 billion worth of deposits, along with the wholesale Anglo Irish Bank Corp. (International) PLC and its $2.1 billion in deposits. The transfer will bring in 120,000 new customers for AIB along with 210 employees from the transferee bank.

Naturally, AIB is taking every step to ensure minimal inconvenience to the "new members" in the family. Government transfers of this scale are new territory for the nation, so it's reasonable to assume there will be some difficulty integrating the new units and customers. But in general, this is a positive step for AIB and for the people of Ireland as well. I believe the road to recovery lies ahead. Specifically, the transfer of assets to the bank would not only boost the morale of the banking sector in Ireland, but it also represents an important step for the bank itself in improving its liquidity and reducing its loan-to-deposit ratio.

The Foolish bottom lineThanks to the acquisition of one of its large competitors, business opportunities for AIB should expand. The key remains with the management team and on its ability to retain customers. Increasing revenues will be the primary focus at a time when investors have lost faith in banks and deposits are hard to come by.

But most significant is that the markets are speaking favorably of the deal itself. The positive effect of the transfers could be seen on the value of "cash bonds" and "credit default swap" rates in the markets today. The 4.5% 2012 senior note traded a full 3 percentage points higher than its previous close. Credit default swap quotes declined by 250 basis points. Both indicate that the bond market is regaining some confidence in the bank.

This may be the opportunity AIB was looking for to salvage itself from the ongoing economic crisis and increase shareholder value. It is also playing a crucial part in absorbing "bad assets" from nonperforming banks, thus paving the way for economic recovery. Fools should stay tuned for more on an Irish recovery.

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